Anyone reading a list of the richest people in America can’t miss the fact that a good number of those names made their fortunes by investing in commercial real estate.
You don’t have to dream of rubbing elbows with members of the 10-figure net-worth club to enjoy the many benefits of owning income-generating rental properties. Rental properties can provide a host of tax benefits, steady income, portfolio diversification, and the opportunity to increase your total net worth through asset appreciation.
Let’s break down each of those categories, as well as examine some of the potential pitfalls that may come with owning investment real estate.
Owning rental real estate has proven to be a sound investment for millions of Main Street investors, but it also can require a tremendous amount of work. In addition to ongoing landlord duties for active real estate investments, you’ll also have to educate yourself on market trends and demographics, asset types and classes, property valuations, investment horizon, cash flows and leverage, and a whole lot of additional metrics in order to make informed investment decisions.
Once you’ve gotten all those important pieces assembled and you are ready to put the board in play, here are some of the benefits you may potentially enjoy as the owner of a rental property:
You also can diversify your investment portfolio by purchasing rental properties in different geographical regions, as well as by property type and asset class. Lastly, returns generated from owning and divesting investment real estate may lead to greater overall yield from your investment portfolio, or it can help balance out the negative effects of underperforming investments.
We’ve highlighted some of the primary benefits associated with owning an investment property. A few of the pitfalls that can come with owning a rental property include illiquidity, shifting neighborhood demographics that can lead to tenant vacancy, expensive maintenance and upkeep costs on aging assets, unfavorable changes to interest rates or federal/regional tax codes, and the ongoing responsibilities of being a landlord for actively managed rental properties.
Owning an investment property has been beneficial to millions of Main Street investors. There are around 20 million rental properties in the U.S., and roughly 70 percent of them are owned by solo investors, the U.S. Census Bureau reports.3
Having a rental property in your investment portfolio can bring about some significant financial and taxation benefits. However, these perks can be hard to quantify since the various classes of commercial and residential real estate perform much differently in regard to risk, yield, appreciation, and location. Taking all the various factors mentioned here and others into consideration prior to purchasing a rental property may require you to perform lengthy due diligence and seek expert insight.
1United States House Prices Growth, CEIC, https://www.ceicdata.com/en/indicator/united-states/house-prices-growth
2Appreciation of Commercial Property, Hecht Group, https://fnrpusa.com/blog/commercial-investing-statistics/
3Rental Housing Finance Survey, U.S. Census Bureau, https://www.census.gov/programs-surveys/rhfs.html